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Thursday, May 22, 2014

What is Scaling?

Now that you know how to set proper stops and calculate the correct position size, here’s a lesson on how you can get a little creative in your trading.

For those trading multiple position sizes, you can get really flexible and creative on how you manage your risk by “scaling” in and out of your positions.

What is “scaling” and why would you use it?

Scaling in doesn’t mean weighing yourself before, during and after a trade (although it doesn’t hurt to monitor that too!).

Scaling basically means adding or removing units from your original open position.

This technique can be incorporated into your original trade plan OR for the more experienced trader, if the conditions of your trade changes then you can add or remove from your position in the middle of your trade.

Scaling can help you to adjust your overall risk, lock in profits, or maximize your profit potential. Of course, when you add or remove from your position, there are potential downsides to be aware of as well.

In the following lessons, we’ll teach you all about the benefits and drawbacks of scaling in and out of trades. We’ll teach you the CORRECT way to do this so that you don’t go crazy because you took on too much risk and blew out your account.

Benefits

Probably the biggest benefit is a psychological one. Scaling in and out of your position takes away the need to be absolutely perfect in your entry or exit.

Let’s face it – no one can consistently predict price action or the exact turning point of a market. It’s way too difficult to keep expecting to get the best entry possible all the time. You are setting yourself up for a lot of heartache.

The best we can do is identify an “area” of potential support/resistance, reversal, momentum change, breakout, etc. You can enter your position in bits and pieces around those areas and/or take your trade off at different levels to lock in profits.

How much easier would it be on you psychologically if you didn’t have to accurately pinpoint exactly where to get in or out of the market? A lot easier right?! Plus you don’t have to be a accurate like a sniper and catch a move from its inflection point (ooohhh, big word!) to grab some pips!

It also takes a lot of weight off of your shoulders anytime you can reduce risk right? How about locking in profits? Properly executed with a trailing stop, scaling out of winning positions can help you protect your profits just in case price suddenly reverses.

Finally, if you add more to your open position, and the market continues to go your way, your bigger position size will increase the amount you will make for every pip.

Drawbacks

The major drawback of scaling is when you add more to your position. Can anyone guess what that drawback is? You got it….YOU INCREASE YOUR OVERALL RISK!! Remember, traders are “risk managers” first, and if done incorrectly, “scaling in” can wipe out your account!! Lucky for you, we’ll explain how to SAFELY add to an open position.

The second drawback is when you remove portions of your open position, you reduce your max potential profit. Who wants to do that? Well, in markets as fast and dynamic as the foreign exchange market, it may benefit you to reduce your risk and “take some off the table.”

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Risk Warning

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial adviser if you have any doubts.